We recently published a list of12 Cheap Chinese Stocks to Buy According to Hedge Funds. In this article, we are going to take a look at where NetEase, Inc. (NASDAQ:NTES) stands against the other Cheap Chinese stocks to buy.
Trump’s Back and China’s Stimulus Lags
Trump is back as the President of the United States and China’s stimulus plans have let down investors, which has created more economic uncertainty regarding China. China is trying to fix its economy and Trump’s comeback to the White House means steep tariffs for Chinese-made goods. In his first term, President-elect Donald Trump imposed tariffs up to 25% on Chinese goods, initiating a trade war between two global giants. Trump’s second stint in the office is expected to imply tariffs as high as 60% on Chinese-made goods.
On the other hand, China’s stimulus of $1.5 trillion or nearly 10 billion yuan to back its economy doesn’t seem to appeal the investors. China’s stimulus has come at a time when the economy is struggling badly and there are potential tariff threats from the new U.S. administration. In addition to that, overseas companies are drawing their money out of China as the growth outlook seems gloomier. In the first nine months of 2024, foreign direct investment (FDI) slid nearly $13 billion. According to China’s Administration of Foreign Exchange, the FDI outflows exceeded $8.1 billion in Q3, potentially leading to a net FDI outflow for the first time since 1990. This shows that investors are still pessimistic regarding China’s economic reforms aimed at stabilizing growth.
The consumer price inflation (CPI) in October eased to 0.3% year-over-year compared to an expected 0.4%, while the producer price index (PPI) dropped by 2.9% year-over-year in October, slightly widening from the 2.8% decline observed in September 2024. Following the U.S. elections and China’s lower-than-expected inflation outcome, UBS has lowered China’s 2025 GDP growth estimate to 4% from the 4.5% it made in October. The Swiss Bank anticipates the GDP growth for 2026 to be also considerably lower.
What Could Happen in the Short-Term and the Long-term?
With Trump’s victory and the news regarding sparking expectations of steep tariffs, U.S. importers are expected to rush to front-load goods from China before the Presidential inauguration in January 2025. This could potentially lead to cost increases and deliver a surprising push to Chinese exports.
In the long run, analysts expect Trump’s tariff policy’s impact on the Chinese economy would be modest. However, the additional tariffs could hit exports and lead to a higher fiscal deficit or currency depreciation for China. Economists at Capital Economics project that the direct impact of large U.S. tariffs on China would be less than 0.5% of its GDP. The reason for this can be exporters finding alternative routes via other countries and also receiving support from depreciation of the yuan.
The Hang Seng Index has plunged more than 4% over the last five days, as of November 15, while the CSI 300 index has plummeted by nearly 2.50% in the last five days and is up by almost 3% in the last month. We can see the mixed reaction of the market considering the recent events.
With that, let’s take a look at NetEase, Inc. (NASDAQ:NTES) and what's up with the Chinese stock.
NetEase, Inc. (NASDAQ:NTES) Misses on Earnings: Is It Still a Buy Among Cheap Chinese Stocks?
A professional stock market trader in a suit in front of a computer, monitoring movements of different stocks.
Our Methodology
To find the 10 Cheap Chinese Stocks to Buy According to Hedge Funds, first, we used stock screeners and shortlisted Chinese stocks listed on US exchanges with a market capitalization of more than $1 billion and a forward P/E ratio of less than 15, as of November 15. We narrowed down our selection to 10 stocks that were the most widely held by institutional investors and ranked them in ascending order of the number of hedge funds that have stakes in them, as of Q2 of 2024.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
NetEase, Inc. (NASDAQ:NTES) is a Chinese technology firm with a major presence in the e-gaming segment. The company operates through four business segments including the Online Game Service, Youdao, Cloud Music, and NetEase Live.
The gaming segment of the company is well-established and is known for Westward Journey, the Onmyoji series, and others. NetEase’s gaming division has a portfolio of over 100 game products and strategic collaborations with leading gaming firms. The company also provides games licensed from external game creators. Other segments such as Youdao offer intelligent learning services, while NetEase Live provides advertising services via high-end email and other value-added services.
Earlier in March 2024, the company partnered with Sandsoft Games to establish a joint venture to expand its game publishing and esports activities in the MENA region. Saudi Arabia is one of the fastest-growing economies, and it is widely investing in gaming sectors, which gives NetEase an opportunity.
NetEase underperformed in the third quarter of 2024 as the company’s earnings fell short of analysts’ estimates. The company missed consensus estimates mainly due to concerns regarding the core gaming segment’s competitiveness. However, the PC games segment was the highlight with growth in net revenue which improved 29% from a year ago and 30% compared to last quarter.
NetEase is also focused on its AI-driven subscription services which have experienced six consecutive quarters of rapid sales expansion, with nearly 200% year-over-year growth in Q2. NTES currently has a forward P/E of 10.54 and is trading at a discount of almost 18% compared to its sector median of 13.83.
Overall, NTES ranks 6th on our list of cheap Chinese stocks to buy according to hedge funds. While we acknowledge the potential of NTES as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NTES but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
